As a landlord or property manager, there will likely be times when you have to deny someone’s rental application. There are various reasons this could occur, and it’s always important to stay legal and compliant – because the last thing you want to face is legal action over your decision.

An adverse action notice – also known as an adverse action letter –  is a key document federal law requires when you deny a rental application based on information from a consumer report, such as a credit check or background screening. An adverse action notice acts as a legal protection in the case of denial and offers transparency to applicants about the process.

It doesn’t matter if you are a seasoned property manager or a first-time landlord; knowing what adverse action notices are and how to use them matters in maintaining fair housing compliance and professional online tenant screening practices.

For example, what happens when a background check reveals concerning information? What if an applicant’s credit score doesn’t meet your requirements? Or what if multiple factors contribute to your decision to deny an application?

Let’s look at everything you need about adverse action notices, including when they’re required, what they must include, and how to properly issue them to maintain compliance with the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA).

What is an Adverse Action Notice?

An adverse action notice is a formal communication required by federal law when you take "adverse action" against an applicant based on information in their consumer report. 

In the rental context, this situation usually occurs when you deny a rental application, require a higher security deposit, or require a co-signer based on the results of an applicant's credit report or background check.

Fair Credit Reporting Act (FCRA) requires that landlords provide this notice whenever they take adverse action based – wholly or partly – on information from:

  • Consumer credit reports
  • Background check reports
  • Rental history reports
  • Information from previous landlords or employers
  • Other consumer reporting agency information

Adverse action notices extend beyond mere formality – and it’s more than just knowing how to run a credit check on a tenant. These notices serve several important functions in the rental process – both to protect the property owner as well as the rights of the tenant:

  • They provide transparency to applicants about why they were denied
  • They allow applicants to correct any errors in their consumer reports
  • They help protect landlords from discrimination claims by documenting the legitimate, non-discriminatory reasons for denial
  • They ensure compliance with federal consumer protection laws

When is an Adverse Action Notice Required?

As a property manager or landlord, you’ll need to provide an adverse action notice any time you take denial (also known as “undesirable”) action based on information in a consumer report. Adverse action notice requirements can include:

  • Deny a rental application, resulting in denied credit
  • Require a higher security deposit than advertised
  • Require a co-signer
  • Require additional rent paid upfront
  • Deny a lease renewal
  • Increase rent due to information in a new consumer report

Remember: Adverse action notices are required even if the consumer report is only one factor in your decision. 

For example, if you deny an applicant both because of their credit score and because they don’t meet your income requirements, you still need to provide an adverse action notice because the credit information impacted your decision.

Consider these common situations where an adverse action notice would be required:

The Recent Graduate

Sarah, a recent college graduate, applies to rent her first apartment. Her consumer's credit score is 680, which falls below your minimum requirement of 700. 

While she has a stable income from her new job, her credit report causes you to require a co-signer. Even though you’re not denying her application outright, you still have to provide an adverse action notice explaining why she needs a co-signer due to her credit report results.

The Self-Employed Applicant

Marcus is a self-employed consultant who applies to rent a luxury condo. His income is substantial, but you notice that his background check reveals eviction records from five years ago. 

You decide to require two months’ security deposit instead of one. Even in this case, an adverse action letter would be sent to Marcus to inform him of the findings of his background check.

The Lease Renewal Situation

The Thompsons have been renting from you for two years, and their lease is up for renewal. During the renewal review, you run a new credit check and discover several recent late payments on their credit report. You decide to increase their security deposit for the renewal term based on what you’ve found in their report. 

Even though they’re existing tenants, you must give them an adverse action notice explaining why their renewal terms have increased from their current lease.

Each of these cases – while unique – shows why you should always consider sending an adverse action notice any time you utilize a credit report in the decision process!

What Must Be Included in an Adverse Action Notice?

Federal law sets specific requirements for what information must be included in an adverse action notice. 

To maintain compliance with both the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA), here’s what you need to make sure and include in any adverse action notice:

Your Contact Information

  • Your name (or company name)
  • Complete address
  • Phone number where applicants can reach you with questions

The Consumer Reporting Agency Information

  • Name, address, and phone number of the agency that provided the consumer report
  • This includes any credit bureaus, services you use to run background checks for renters, or tenant screening companies used

Statement of Action Taken

  • Clear explanation of what adverse action was taken
  • Specific reasons for the adverse action
  • You must list the principal reasons that led to your decision

Consumer Rights Information

  • A statement that the consumer reporting agency did not make the decision
  • Notice that the applicant has the right to dispute the accuracy of the information
  • Information about obtaining a free copy of their consumer report within 60 days
  • If a credit score was used, you must include:
    • The numerical score used in your decision
    • The range of possible scores
    • Key factors that adversely affected the score
    • Date the score was created

The Written Notice

  • Inform the candidate about potential negative impacts on their employment status due to findings in background checks
  • Ensure transparency in the hiring process
  • Provide candidates with the opportunity to respond to the information before a final decision is made

Sample Language

So, what does this information look like in action? Here’s an example of how these requirements may be included in an adverse action notice you send to a tenant or potential tenant:

"Based on information obtained in a consumer report from [Agency Name], we regret to inform you that your rental application has been denied. The following factors influenced this decision:

  • Credit score below our minimum requirement
  • History of late payments
  • High credit utilization ratio

Please note that [Agency Name] did not make this decision and cannot explain why the decision was made. You have the right to obtain a free copy of your consumer report from [Agency Name] within 60 days of receiving this notice. You also have the right to dispute any inaccurate information in the report."

This example shows how you can easily include all of the necessary information within a single notice – giving the recipient the information they need as well as covering your legal and compliance obligations. Knowing how to screen tenants and send adverse action notices go hand in hand!

Related: 5 Strategies for Effective Background Check for Renters

Common Mistakes to Avoid When Issuing Adverse Action Notices

While adverse action notices might seem easy enough, landlords and property managers often make mistakes that could lead to compliance issues.

These errors can quickly lead to legal risk – as well as damage your professional reputation and future relationships with tenants. It’s never worth risking the potential damage of poor notice implementation! Here are some of the most common mistakes to avoid when handling these notices:

1. You Provide Vague or Incomplete Explanations

Clarity and specificity matter when communicating adverse actions to applicants. The law requires detailed explanations that give applicants a clear understanding of why they were denied and what factors influenced your decision. 

Being transparent in your communication helps maintain professionalism and reduces the likelihood of disputes.

  • Specify exactly which requirements weren't met based on the consumer report
  • Detail the particular aspects of the credit or background check that influenced your decision
  • Provide specific reasons that the applicant can understand and potentially address

2. Missing Critical Time Windows

Timing is a critical component of adverse action notice compliance that many property managers overlook. Delays can seriously impact your compliance status as well as the applicant’s ability to exercise their rights. Here are a few key timing considerations:

  • Notices should be sent within 7-10 business days of your decision
  • Delayed notices might make it impossible for applicants to exercise their right to obtain a free credit report within the 60-day window
  • Failing to maintain consistent timing across all applicants could raise fair housing concerns
  • Electronic notices should be sent with delivery confirmation to document compliance

3. Credit Score Disclosure Errors

Credit score reporting requirements – particularly those involving credit scores – are among the most technically complex aspects of adverse action notices. Many landlords struggle with proper disclosure of credit information, often missing crucial elements required by federal law.

Some may fail to include the actual numerical score used or may not include the full range of possible scores. They may also omit key factors that affect the score, as well as the credit scoring model used. When in doubt, always offer as much information as possible.

4. Inconsistent Documentation

Poor documentation practices can leave you vulnerable to legal challenges and make it difficult to defend your decisions if questioned. 

Make sure to have a system in place to keep copies of sent adverse action notices and document when and how the notices were delivered. You’ll thank yourself later for building a system by which to track everything!

5. Improper Handling of Multiple Applicants

Managing adverse action notices for multiple applicants requires that you pay close attention to privacy laws and individual rights. When dealing with joint applications or co-signers, you must notify all affected parties and maintain separate records of each applicant’s report information.

6. Fair Housing Compliance Issues

Fair housing compliance plays a significant role in adverse action notices. Inconsistent practices can lead to discrimination claims – even when unintentional – so never skip past these important steps. 

Here are some of the common mistakes made when it comes to Fair Housing Compliance:

  • Using different standards for different applicants
  • Including subjective or potentially discriminatory reasons
  • Not maintaining consistent documentation of decision criteria
  • Failing to apply screening criteria uniformly

Tips for Handling Responses to Adverse Action Notices

What should you do when you send out an adverse action notice, and the tenant or prospective tenant responds negatively? Naturally, it’s common to have adverse reactions to adverse notices, but being prepared to handle them properly can save you a lot of time and headaches.

When Applicants Request More Information

Don’t be surprised when applicants contact you after receiving an adverse action notice seeking additional details. 

While you're not required to provide information beyond what's in the notice, maintaining professional communication can help prevent disputes. Direct them to the consumer reporting agency for questions about their consumer report – but be prepared to explain your minimum rental requirements.

Dealing with Disputes

If an applicant believes the information in their consumer report is incorrect, they have the right to dispute it with the consumer reporting agency. 

As you can imagine, your role is limited in this instance – the dispute must be handled directly between the applicant and the agency. It’s still good to be prepared to review updated information if the dispute results in corrections to their report.

Requests for Reconsideration

Sometimes, applicants will ask you to reconsider your decision after addressing the issues mentioned in the adverse action notice. 

Have a clear policy for handling reconsideration requests – such as how much time has passed, what documentation they can provide, and whether circumstances have changed.

If an applicant offers new information or documentation after receiving an adverse action notice, make sure you document all updates to their file. Keep records of any supplemental materials provided and note any changes to your decision based on what they send you.

Managing Multiple Communications

Just like sending notices to multiple parties, make sure you maintain separate communication records for each person. Be careful not to share one applicant's personal information with other parties, even if they applied together.

Training Staff Responses

Do you have property managers or office staff who handle your adverse action notices? Make sure anyone interacting with applicants understands how to properly handle post-notice communications – as they will be acting on your behalf throughout the process!

With Adverse Action Notices, A Little Knowledge Goes A Long Way 

Knowing how to prepare and execute adverse action notices is a key part of the role of any landlord or property manager. Remember, these notices aren't just legal formalities – they're essential tools that protect both you and your applicants while maintaining professional standards in your rental business. 

Streamline Your Processes with TenantCloud

Here’s the good news: Managing adverse action notices doesn't have to be complicated. TenantCloud's property management software helps streamline your tenant screening and communication processes. 

By utilizing TenantCloud's comprehensive property management solution, you can maintain compliance while efficiently managing your tenant screening process from application to decision. Our platform helps you stay organized and professional while protecting both your business and your applicants' rights.

Want to learn more about effectively managing your tenant screening process? Visit our tenant screening guide, or start your free trial today.